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House Money

Morning Markets Briefingby ConvergEx 1633 Broadway New York, N.Y. 10019 Feb. 5: One of the key issues facing capital markets in 2013 relates to how investors will reapportion their portfolios from fixed income to equities over the course of the year. Most of the baseline assumptions we hear involve the following logic: Bond investors are sitting on large gains, which they will shift over to stocks because interest rates are low and fixed-income investments have very limited upside. Turbocharging that narrative is a behavioral finance construct labeled "house money" —the notion that human agents take greater risks with gains than they do with base capital. Yes, it's a gambling term – as in "I'm playing with the house's money now. Time to go all in." But just how vulnerable is that coupon-clipping "house money" to a rise in interest rates? A quick look at some of the most popular fixed-income ETFs of the last three years finds that it would take a 200-basis-point [two- percentage-point] backup in rates to threaten the risk-loving house money which should migrate to stocks in 2013. -- Nicholas Colas

Not High, but Broad

Equity Strategyby Wells Fargo 420 Montgomery St. San Francisco, Calif. 94104 Feb. 5: While the overall rate of fourth-quarter 2012 year-to-year earnings growth continues to slow, versus one quarter earlier and one year ago, the breadth of earnings up versus earnings down is higher. Overall, this suggests a broader participation in earnings expansion across S&P 500 companies. This appears to be aligned with a broadening in growth across industries within the domestic economy.

Thus far, with roughly half of the names in the S&P 500 reported, 67.5% of companies have outperformed Street estimates (versus 62.8% at the midpoint of the third quarter 2012 reporting season, and 60.3% early in the fourth-quarter 2011 reporting season).

Overall, the ratio of earnings up versus earnings down is 2.38:1 for the fourth quarter of 2012 versus a ratio of 1.66:1 at this point in the third quarter 2012 reporting season, and a 2.09:1 ratio near the middle of the fourth quarter 2011 reporting season. -- Stuart T. Freeman

Home Sales Go Retail

Mortgage Applications for Home Purchase Picking Up by MFR 675 Third Ave. New York, N.Y. 10017 Feb. 6: Weekly data from the Mortgage Bankers Association show that mortgage applications for home purchase have picked up, indicating improving demand for homes from retail buyers. Until recently, this normally reliable indicator of the trend in demand for housing had been languishing at levels well below where history suggested given the reported improvement in existing home sales.

This was because much of the growth in existing home sales had stemmed from speculative demand financed by large pools of capital raised by various financial institutions. These bulk purchases obviously occurred outside the traditional mortgage process, and thus the wide gap between home sales and mortgage applications.

Now, with retail demand for existing homes evidently picking up (although we would caution that the evidence is still in its very early days), we could be seeing a more sustainable move in home sales. This is important given the still enormous inventory of distressed properties overhanging the market, and also from the perspective of the knock-on effect to consumer demand for housing-related products. -- Joshua Shapiro

Knocking on the Door

Economic and Stock Market Outlooksby Standard & Poor's Capital IQ 55 Water St. New York, N.Y. 10041 Feb. 6: Dow 14,000 has proven a challenging level to eclipse, as renewed concerns over European sovereign debt added to investor nervousness following a strong multi-month rise in U.S. equities. But like a rusty door, these levels typically require several attempts before finally swinging open. We think this level will be no different. We are maintaining our 1550 12-month target for the S&P 500, however, as we expect political rhetoric and disagreement to heat up in the coming weeks, full-year EPS growth projections to moderate in the next few months, and volatility to intensify as the year progresses. -- Sam Stovall

Lag Time

Unique Market Insightsby Alfstad Capital 1420 Fifth Ave. Seattle, Wash. 19004 Feb. 7:Productivity fell a full 2% during the fourth quarter of 2012, and, simultaneously, unit labor costs rose 4.5%. This is classic stuff; new hires have a lag-time in which their contributions to output fail to match those who have been in place longer. But let's not get too wrapped around the axle on just 2012's final quarter; let's look at the whole year, too.

It shows a tiny 1% gain in productivity and an imperceptible increase of only 0.7% in labor costs. While profits might be strong, this tells us that we are not gaining ground, we are not enjoying progress as an economy, and, most of all, our workforce is not enjoying gains in income that even match inflation, much less exceed it. -- Mike Alfstad

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